Valuation analysis for The Home Depot, Inc. (NYSE:HD)

October 10, 2014, 13:31 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

This is the twelfth is a series of 30 public reports that cover all of the DJIA stocks.  The intention is to identify fair value for each one of these companies, one by one, in order to appropriately define fair value for the DJIA as well.  The data being used and the valuation analysis for the Market is currently available to subscribers of Stock Traders Daily.

The Home Depot, Inc. (NYSE:HD) is a stock that has been growing at a rate close to 20% until recently.  The yearly trailing 12 month growth rate has declined to 12.74% after the most recent earnings report, but I don't know anyone who would consider that to be a bad growth rate for a company like Home Depot.  In fact, analysts seem to expect the company to continue to grow at a rate faster than that going forward.  That makes Home Depot very interesting from an investment point of view.

Furthermore, dividend players love the fact that Home Depot has increased its dividend aggressively.  Since 2008 the dividend has almost doubled, and that's fantastic because the company is returning money to shareholders and proving that it has a sound financial footing.  When dividends increase this fast it could be due to frivolous management, but that is not likely the case for Home Depot.  The company seems to have increased its dividend appropriately given associated earnings and revenue growth.

In addition, although multiple expansion has clearly taken place, it has also taken place on the heels of solid yearly EPS growth, so the multiple expansion was warranted.  As the multiple expanded, the peg ratio for Home Depot also increased, but again that increase was in line with the rapid yearly EPS growth rate the company is experiencing and is expected to continue to experience.  In fact, with a current peg ratio of 1.77 and a growth rate expected to be greater than 12.77% the stock actually looks like a relative value play.

Technical take:

According to our real time trading report for HD the stock has recently tested longer-term resistance and the stock is in the process of declining towards longer term support.  So long as resistance remains intact we would expect the stock to decline to support, but resistance also acts as our risk control and if resistance breaks higher instead of the decline to support before the stock moves higher again we would expect the stock to break out of its current channel and accelerate to higher levels instead.  Treat resistance as inflection, the recognized it has already been tested and by rule we should expect it to hold and by rule we should expect a progression to support.

Summary:

Although Home Depot looks like a relative value on a fundamental basis and although we appreciate the yearly EPS growth, revenue growth, and dividend increases, the test of longer-term resistance that has already happened tells us to expect additional declines before the stock stabilizes and turns higher again.  Therefore, there are no buy signals for Home Depot at these levels and there will not be unless longer-term support is tested, but once that happens Home Depot may be an excellent by so long as current analyst expectations are not revised significantly lower.

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